Amadi: Nigeria Can Benefit from Single Regulator for Gas and Power
For convenient, speedy and transparent coordination of gas supply for electricity generation, Chairman of the Nigerian Electricity Regulatory Commission, Dr. Sam Amadi reasons that joint regulation of the gas-to-power and electricity market would be apt f
Why has our electricity generation capacity remained so low at this stage of the reform? It is true that there is not much increase in generation capacity for the past couple of years. This has created the wrong perception of failure of the power sector reform. So, the question is why we have not grown more capacity.
We have not being able to hit the 6,000 megawatts target largely because of the unavailability of gas supply to power plants. If there is sufficient gas to power plants we will today have more than 5,500 megawatts. This will significantly improve power supply and for one we will have roughly an average of 10 hours steady supply across many cities. But excuses on gas supply deficit seems to have lingered far too long? Many critics will ask why gas is an intractable problem. Ordinarily we should not have a problem of gas supply to power because we are a gas country. But the truth is that having abundance of gas does not translate to gas supply to power plants.
The first fact is that gas supply to power is outside the direct control of the regulator of electricity. So, we can’t predict accurately how much gas will be available. In MYTO 1 we forecasted that we would have enough gas to do about 9,000 megawatts. This was in 1998 before I came to NERC. This forecast failed because the gas people failed to deliver.
We became wiser and began to benchmark the MYTO on more conservative, almost pessimistic projection of capacity growth. We expected to end 2014 at above 5,000 megawatts. But still our expectation on gas supply did not materialise. So, what were the challenges that you discovered? We have always known that gas supply is the Achilles heels of the sector. The fundamental problem is that the regulatory regime for gas transportation is different from electricity. So there is no strong coordination of the two sectors and this makes for poor project management.
This is one of the first issues I raised when I was appointed Chairman of NERC. I raised it in several newspaper interviews and public presentations. I also discussed this with the Minister of Power then. Gas is the most vital feedstock for power today. Yet we have no decision authority regarding its availability. In other jurisdictions like in the UK and the US where we borrowed our model the regulator of electricity regulates gas transportation and supply to power plant. This makes for coordination and efficiency in the various pricing points. The new government has to review that situation. But gas supply to non-power sector has remained quite steady? Yes, the second fundamental cause of the gas problem is the problem of commerciality. Until recently there was little incentive for gas suppliers to dedicate more gas to power plants or build gas infrastructure to cope with growth in electricity demand.
First, the price for gas to power has been very low below market price. Additionally, before the recent intervention, power sector had an overwhelming gas debt burden.
Even as we cry about pipeline vandalism, gas supply to non-power sector remained steady whilst supply to power declined. It means that power sector was not competitive in gas supply. Again, supply was not based on enforceable contracts.
Gas suppliers only undertook to supply to power sector on ‘best endeavour’, which means they suffered no financial liability if they don’t supply gas. Now, we have got a commercially attractive gas price and the commencement of the Transitional Electricity Market means that all value chains of electricity supply will be based on bankable contracts.
So, gas suppliers will now enter into gas supply contracts which exposes them to liability if they don’t supply contracted quantities of gas to power. So, through regulation action we have largely cured the commerciality problem of gas supply to power plant.
The rest of the problems, stopping vandalism and enforcing domestic supply obligations are policy intervention by the government. Once this is done, including full commercialisation of gas market and separation of gas from the NNPC, then we have steady and ordered procurement of additional generation. Gas has been a major constraint. Certainly, gas hasn’t been the only reason for missing the generation target? The other reason for missing the generation target is the non-completion of NIPP projects. This is a problem of project management. Things have improved drastically since 2013. But it improved late for immediate and comprehensive impact. So, we have all the NIPP plants fully completed with full and bankable gas agreements we would be doing more than 6000 megawatts now. None of these problems are traceable to NERC. How hands-on is the NERC with any of these problems? We are actively responding to these problems with regulatory tools. Take for example the problem of commercial incentive for gas supply. We have responded by allowing $2.50 as cost of gas and $0.80 as transport cost for gas.
This price makes it encouraging for gas suppliers to supply to power plants. Again, we have ensured bankability through enforceable gas supply and transport contract. Under TEM every gas supplier has assurance that based on take-or-pay contract he is financially covered.
End-to-end of the value chain, all contract counter parties are financially covered. But the biggest response to the lack of capacity in the short to medium term is the embedded generation regulation.
It is an extreme foresight and problem solving thinking on the path of NERC that it crafted the embedded generation regulation earlier in 2012 before privatisation. With the regulation we can procure more power quickly off grid, that is not through central procurement by the bulk trader, while waiting for the bigger megawatts that will take a couple of years to be on the grid. So, it is possible for the Discos to increase their portfolio of electricity for the consumers through embedded generation.
Already we expect that Eko Disco will be able to procure about 300 extra megawatts through this process and serve consumers in Lagos. The same goes for Ibadan, Ikeja and Enugu Discos. Recently we approved a streamlined framework to make it easier for Discos to procure embedded power. So, the prospect of capacity increase is bright in the short to medium term through embedded generation.
For the long term, we have no problems. We have enacted the bulk procurement guidelines that ensure efficient and orderly procurement of large capacity generation in the future. This will ensure that we can predict amount of power we can add to the grid every year. How is it that over 30 IPPs have been licensed by NERC but no single power has come from them? Since 2006 when the commission began operation it has continued to license independent power producers to generate power. Unfortunately, these companies have not started to add power to the national grid. The reason is that unlike in telecommunication, electricity requires a lot of grandfathering.
In telecom you just liberalise and the new licensee starts to roll out services. This is different in electricity. Until 2012 when we issued the MYTO 2, no one would have signed a Power Purchase Agreement (PPA) because the pricing of electricity does not cover the cost of production. We had to work hard to review electricity tariff in Nigeria by first developing a methodology that provides certainty and transparency.
With this methodology that is constantly refined, we have debugged the sector of the most severe regulatory risk. We have a well-regarded financial model that every would-be investor can use to do a back of envelope calculation of what his returns will be before investing in this sector.
In the past this was not so. Former Governor of CBN now Emir of Kano informed me that until when NERC announced the new tariff regime, the AFC owned largely by Nigeria could not even consider any investment in electricity in Nigeria. Why? Because the critical condition making such investment is not there. Again, until the Nigerian Bulk Electricity Trading Company (NBET) was established late 2011, all licensees could not close the financial deals because there was no credible off-taker of power.
The Discos were totally bankrupt and indebted. That was the reason for the privatisation. Therefore, no investor will be willing to invest without a sovereign guarantee. Since NBET has been capitalized, we are seeing faster movement with signing of PPAs. These licensees are now negotiating PPAs with the NBET and we now have guarantees that they will be able to generate power in a few years’ time. Having quite resolved some of these challenges, can there be a non-political but practical forecast on electricity generation going forward? The problems that militated against increase in generation are structurally. These have been addressed systematically. In the past people approached NERC and requested for license. There may not be guarantee of gas supply and transmission facility and it may take years for them to get concrete agreement on gas.
But today, all that has changed. Our bulk procurement guidelines mean that we procure large capacity through competitive bidding. The winner of the bid would have assurance of gas supply, transmission facility and right of way for the construction of the power plant. So, henceforth, when we say we will add 5,000 megawatts next year it is not a political statement. It has passed through the crucible of project management and due diligence.
This is how NERC has changed the game and now making it possible to easily and accurately predict procurement of large capacity in generation in Nigeria in the medium to long term. Major sector players consider the current state of transmission as a formidable bottleneck that should be de-bottled, how is NERC taking this message? One of the other most formidable bottlenecks is transmission. Don’t forget that the federal government recognised the fragility of transmission capacity as far back as 2001 in the National